Rising mortgage interest rates have widened the gap between what it costs to buy a house versus renting one, according to BNZ chief economist Mike Jones.
In his latest Eco-Pulse publication, Jones has crunched the numbers on some hypothetical examples to test how the cost of buying compares with renting at the moment. These are the examples:
A home is purchased at the NZ median house price (currently 780k), financed with a 20% deposit and the remaining 80% as (interest only) debt. Interest costs are split equally across floating and 2-year fixed mortgage rates. To this we add maintenance, rates, and insurance costs at an assumed annual rate of 1.5% of the national median house price.
A new tenancy is entered into at the NZ median rent ($550 per week). To make it a fair comparison, the 20% house deposit deployed in the ‘buy’ example above is left earning interest in the bank. These (after-tax) interest returns partially offset total rent costs. For clarity we’ve split the effect out in the chart below (see the blue lines).
"In terms of operational costs – the cash leaving a bank account each week – the costs of servicing a new house purchase are currently much more expensive than equivalent rent costs," Jones said.
"On our numbers that’s always the case, but particularly so at the moment."
He said current cash ownership costs for a new purchase have increased to around 50% of average household incomes, compared to around 30% in 2020.
Rent costs, by comparison, have nudged up to an average 24% of household incomes, or 18% once interest earnings are added back in. Jones has made the assumption, for comparability, that renters park a 20% house deposit in the bank. "This makes the comparison fair but of course may not reflect reality."
Jones said the average expense associated with purchasing the median New Zealand home currently exceeds that of renting by just over $38,000 per year "according to our back-of-the-envelope numbers".
"That’s seemingly a large number to overcome. But if house prices were to rise by around 5% over the coming year, this shortfall would be entirely offset by a positive house price revaluation (admittedly a paper ‘gain’ rather than cash). In contrast, if house prices were to go in the other direction it would dramatically increase the shortfall," he said.
The divergence between buying versus renting is currently largest in Auckland (63% of income to service a new home vs. 24% of income to rent, or 16% when savings income is added in) but is "observable in all regions", according to Jones.
Average servicing costs remain lowest in Canterbury reflecting lower house prices.
"Overall, it’s clear that high interest rates have widened the wedge between the costs of renting vs. buying."
But despite all this, Jones said it’s not necessarily the case that renting will turn out to be the most cost-effective option over the long-term.
"First, inflation tends to deflate the value of borrowers’ debt over time, while rent payments tend to rise with inflation. But more importantly, what happens to house prices ends up being the key swing factor. And no one knows what’s going to happen there."
Jones has produced the graph below that plots the concept of the rate of house price inflation required to “break even” on the higher cash costs of buying.
He said that "consistent with our earlier analysis", it shows, on average, positive rates of house price appreciation are always required to break even.
However: "The current estimate of such is well above average and the highest since 2008."
As a sign-off Jones said that all the number crunching "is all well and good", but it risks missing the point for some.
"We’ve deliberately focused on the financials here and excluded all the big non-financial and circumstantial considerations involved in a buy/rent decision.
"It’s hard to put values in the spreadsheet for things like security of tenure and being able to hang your pictures up or renovate. When it comes down to it, these may well end up being the most important in the decision."
173 Comments
Owning still beats renting over the long run. Better than paying off someone else’s mortgage. Suffer now or suffer later kinda mindset.
That was the line of thinking that was behind the buying in 2020 - 2021 as house prices rose significantly.
What may have been overlooked is that many of these highly leveraged buyers may find themselves in cashflow stress when they need to renew their mortgage interest from 2-3% levels to current 6.7- 8% levels.
If they need to sell, it is likely that many have lost a significant portion of their initial deposit saved over many years (or may even be in negative equity) due to the fall in property prices.
If they can hold on, then many of the leveraged buyers of 2020 - 2021 may need a few years before they are back at their initial equity levels (after including the 'savings' from principal payments made on their mortgage). It would have been better to wait, keep saving and buy at lower prices (refer the story of the Peakers vs Troughers posted previously)
So yes they bought at the peak, but it won’t matter if they can hold on for a few years.
IF
Would be interested to hear from a highly leverage buyer from 2020 - 2021 to share their thoughts. Are they under cashflow stress? Are they under mental stress? How has that affected the state of their mental health?
1) https://www.1news.co.nz/2023/01/18/homeowners-concerned-theyll-lose-hou…
2) https://www.nzherald.co.nz/nz/brings-tears-to-my-eyes-family-consider-s…
FYI, note that there are approximately 19,000 households that were in mortgage arrears according to Centrix.
I’m fortunate my income is high enough to hold onto it for now
Good for you.
There will be some who can hold on and others who are unable to hold on. There have been reports of owner occupiers and non owner occupiers who have been unable to hold on.
Who is to blame if one doesn’t have a good income or maxed out on something they couldn’t afford?
There are borrowers who took on large amounts of debt that they could afford at the time of purchase in 2020 - 2021, but may now be unable to afford in light of recent increases in mortgage interest rates.
People are free to choose, however they are not free to choose the consequences of their choice.
Some DGMs are still waiting for the plethora of mortgagee sales since the tightening of credit, keep waiting.
People are free to choose yes, but they’ve got to ensure they can pay their mortgage at higher rates too, if not that’s irresponsible assuming rates will stay that low.
I've got friends who are not very financially literate who bought a house in Chch. They asked on Facebook for financial advice. The conversations went something like, "We want to buy a house but know nothing about it." They were recommended brokers and financial advisors. Then, "We can't afford rates at 5%, should we buy now since it's 4%?" Many people told them they should buy anyway because interest rates were sure to go down again, so they did. I'm sure there are a bunch of other people just like them out there.
If it's the FHB Facebook group, there can be an awful lot of those comments void of any risk analysis. It's almost like an echo chamber for positivity at all odds. Pointing out that it might not be such a good idea to proceed with something results in you being accused of putting roadblocks in the way of their potential success.
Posts from Solo mums earning $80k p.a. with 2 kids wanting to buy their first home with existing debt and a small deposit, are met with emojis and hugs from Mortgage Advisors giving them false hope.
It was on their personal page, asking their friends. Similar situation and similar impact though some of those friends did say, look, you'll need to stress test yourself against 6%. I messaged them privately and gave them a contact for a financial advisor who was happy to give them free advice as a favour to me (once I had explained their situation to that person), but I don't think they took it up. But yes! No one wants to be 'that person' shutting down others' dreams.
When mortgage interest rates were in the 2.25 - 3.0% range, some bank stress test rates were as low as 5.8%.
Mortgage interest rates are now well above the bank's previous stress test rates.
How many borrowers are potentially facing cashflow stress?
And what will the banks do?
A real life example:
A) Peaker
A friend purchased a house in Auckland in Aug 2021.
1) at time of purchase
House price: 3,000,000
Deposit (20%): 600,000
Mortgage: 2,400,000
2) position today
House valuation: 2,550,000 (15% fall)
Mortgage 2,400,000 (assumed to be interest only for illustration)
Equity: 150,000 (fall in equity value of 75%)
B) Buyer today
House valuation: 2,550,000
Deposit: 600,000 (same deposit as Peak buyer, and assumes no interest earned on their deposit in the bank for 2 years)
Mortgage: 1,950,000
This buyer has a lower mortgage amount and the reduced interest cost of borrowing a smaller amount over the lifetime of the mortgage (25-30 years), as well as the saving of 450,000 that the Peaker has to pay for the same house (as Peakers paid a higher purchase price by 450,000 compared to a buyer today).
Assuming the buyer today makes the same P&I mortgage payments as Peaker, then Peaker will be paying:
1) higher purchase price of 450,000 than a buyer today
2) cumulative additional interest over 30 years (compared to a buyer today) of 562,000
That totals 1,012,000 over 30 years.
A buyer today will be better off financially by 1,012,000 in 30 years time compared to Peaker. Or alternatively, Peaker paid 1,012,000 more than a buyer today for the exact same house. That is 1,012,000 that a buyer today could have available for their retirement that Peaker will not have.
Your examples are all based on the benefit of hindsight
The calculations are a review of past choices.
The calculations illustrate that for owner occupiers, there are times when it is better to rent than to buy, rather than the conventional belief that buying is always better than renting as from your comment from above - "Owning still beats renting over the long run. Better than paying off someone else’s mortgage. Suffer now or suffer later kinda mindset."
There were warnings, which the buyers of 2021 may have dismissed in light of rapidly rising house prices.
There were people who heeded the warnings. Many readers of this web site saw the potential elevated house price risks, however there were also many property promoters with their vested self serving interests who used negative labels to dismiss those commenters who gave those warnings.
From Feb 2021:
https://www.stuff.co.nz/national/politics/300238808/reserve-bank-govern…
After those property promoters got their commission payment / financial payment, there is all this collateral damage of highly leveraged owner occupiers who bought in 2020 / 2021 and may be facing cashflow and mental stress.
CN, can you do this calculation for 3 years from now please... Of course you can't nor can anyone else. Your calculations are correct but they can only be done in hindsight. Someone could equally choose the period from 2018 to 2021 and show how incredibly profitable it is to own vs rent. Both are moot points.
There are plenty out there. Might be hard to identify many, as typically once you reach a certain level of wealth you might pick up a property or two to diversify.
One that springs to mind is one of the contributors to the Monevator financial website over in the UK. Rented for years, invested the proceeds in stocks etc. Has recently bought a house, but the stock portfolio is I think rather larger than the value.
With current house prices and rents, and with knowledge of the huge interest rate associated bull market in property over the last few decades which may now be dead, buying a house is now more of a psychological benefit than a financial no-brainer.
Rented for years, invested the proceeds in stocks etc.
A friend sold their owner occupied house several years ago and invested the entire proceeds in a non property related asset.
The price of that asset increased significantly that they managed to stop working and take the entire family of 4 to live overseas in several countries for several years. They recently relocated to Western Australia to be nearer to his parents.
They were fortunate that the price of the asset increased significantly and they gained a lot more than if they had owned their owner occupied house. Definitely more luck than skill in this case.
There are non property assets that can increase in price far more than property related assets.
But they lost an important element when they sold their house. Leverage. Probably not worth me carrying on this convo further if you don’t understand the importance of that.
Fully understand the impact of leverage.
Leverage works when house prices increase AND leverage works when house prices decrease (as the Peaker example shows a fall in equity of 75% when the house price fell 15% when an LVR of 80% was used).
Note that the asset that the family above purchased (after they sold their owner occupied house) increased several hundred percent from their purchase price - the gains from this single asset purchase far outweighed any equity gains they would have made on real estate leveraged on a LVR of 80%.
Yea it does increase and decrease, but I’m not sure why a couple of you seem fixated on the short term. Also with leverage they could have purchased another 1-2 rentals and would have been far far better off. So it all depends on how broadly or narrowly you choose to think about it.
It depends, absolutely critically, on what house prices do in the future. If the future looks like the recent past (last few decades), buying is clearly best. If we revert to the more normal situation of house prices rising with inflation, I think renting will turn out best.
I do own my own home for psychological reasons, but no plans to buy more until my share portfolio is worth a lot more than my house.
It'll be a few years yet, I'm still in my mid-30s. So far my share portfolio is about 50% of my home equity, and I split spare cash between overpaying the mortgage and buying shares.
I'm still keen on some of the NZ REITs and RVs - some of them look very cheap to me, dramatically better value than buying a rental property and they sort the (mild) leverage out for you. I also used to hold CDI which gives exposure to NZ property very effectively and seems well run. Still, only about 10-15% of my portfolio directly in NZ property/RVs and maybe another 5% in things like FBU, STU which would be correlated.
it is very unlikely that house prices will remain static. It's also very unlikely that rents will remain static. Whereas interest rates won't increase indefinitely.
In terms of the rent vs buy decision, potential owner occupier buyers should make their own key assumptions for these 4 variables:
1) mortgage interest rate over their expected holding period
2) rental inflation over their expected holding period
3) capital growth of the house price over their expected holding period
4) capital growth of alternative investments over their holding period
Under some scenarios owning is better than renting
Under some scenarios renting is better than owning
This will be the largest financial decision for most owner occupier households and hence it will likely determine their financial future.
What should a potential owner occupier buyer do today? Buy or rent?
The key question is should the potential owner occupier buyer on a median household income be buying at today's median price in their neighbourhood or should that household continue to rent and / or buy later, reinvest deposit in another investment? Different owner occupiers have different circumstances and different holding periods. What would you suggest for those with the following time frames?
1) 5 - 10 years - e.g single couple who may upgrade when they have children. Retiree who may downgrade and move to retirement village. Couple with adult working children who may look to downsize.
2) 15 - 20 years - e.g family with teenage children
3) more than 25 years - e.g family with new born children
A young couple with no children who may have bought an entry level home in 2020 - 2021 with a desire to upgrade when they have children in 5 years (say 2025 - 2026) may be unable to upgrade in 2-3 years as they are now in negative equity.
If they are unable to hold on until house prices recover (e.g due to loss of job, inability to continue debt service payments due to rising mortgage interest rates), then they will still owe the bank due to the house sales proceeds (after commission costs) being below their mortgage amount.
They would have lost over 100% of their initial deposit used to buy their house (and took many years to save)
In this case, it would have definitely been better to rent than to buy.
Most people think that the choice under all conditions is between:
1) rent vs
2) buy their own house
However under conditions of high house price risks, and record low interest rates, the choice becomes:
1) rent (and preserve savings which could be used as a deposit to buy a house) vs
2) buy their own house (and risk losing their deposit, risk losing their own house, and still owe the lender money after the house is sold)
FYI, here is an example of owner occupier collateral damage from falling house prices elsewhere around the world:
Here is something that was written back in May 2020 which highlights the potential risks for potential owner occupier buyers when house price risks are elevated.
Let's take a look at the situation for an owner occupier buyer in Dublin in late Jan / early February 2007:
a) Property prices in Dublin have been rising from 1900 to 2007 - that's 107 years of historical data of house prices rising. Based on that, the owner occupier believes that property prices will continue to rise, or not fall by much
b) They read that property market commentators are saying that there is a housing shortage in Dublin and read the following article in the local newspaper on 25 Jan 2007 - https://www.irishtimes.com/news/dublin-housing-shortage-to-continue-1.8…
c) They proceed with a house purchase in 2007 using high amounts of leverage.
Details of purchase:
i) Property price: 162,000
ii) Mortgage @ 80% LVR - 129,600
iii) Equity value saved and used to buy the house - 32,400
Value at 2020 (13 years of ownership)
i) Property price: 137,000 (fall of 15.4% from purchase price - AFTER 13 YEARS of ownership)
ii) Mortgage @ 80% LVR - 129,600 (assumed to be interest only for illustration purposes)
iii) Equity value - 7,400 (77% decline from original equity to buy the house)
House price data - https://tradingeconomics.com/ireland/housing-index
That 7,400 in equity may be used to either:
1) upsize (into a bigger house by younger owners for children), or
2) downsize (into smaller house for retirees)
(Remember that there still payment of sales commissions which would reduce the 7,400 equity value even more - say 3% on 137,000 sale price or approximately 4,100 in sales costs which would result in net equity of 3,300). Haven't even included interest costs in any of the above calculations.
Now how is that 3,300 going to be sufficient for a 20% deposit for a new house (either for the upgrader, or downsizer)? That 3,300 is now only 2.4% of the median house price of 137,000 in 2020.
The owner occupier's financial security had experienced a real set back. These people will have less to retire on. All because of that one decision to purchase a property in 2007.
Now that scenario assumes that the owner occupier was able to hold on. What happened if they were unable to continue debt service payments (such as lost their job, experienced lower weekly wages, etc) and were forced to realise those losses?
2) position today
House valuation: 2,550,000 (15% fall)
Mortgage 2,400,000 (assumed to be interest only for illustration)
Equity: 150,000 (fall in equity value of 75%)
What happens if that person unable to hold on until the house price recovers and needs to sell?
E.g unable to maintain mortgage payments:
- loses employment, experiences large loss of household income,
- insufficient cash buffers to absorb higher interest rates and higher debt service payments
They will lose a large proportion of their equity deposit which took years to save.
Equity above: 150,000
Sale costs of house: 65,000 (2.54% of house price - as per Barfoot and Thompson website)
Equity after sales costs: 85,000 (that is over an 85% loss from their initial deposit of 600,000, a loss of 515,000)
......a home with a smaller mortgage, less interest burden for starters. What's the hurry? You're conveniently assuming renters make poor savers. While rent is certainly dead money, what's interest when it has to be paid?
Like I said above - Que the "those who rent will never own" brigade.
It's where house prices will be in say 9-12 months from now that will decide if this bounce is a trend. More likely than not you're prematurely salivating. We haven't even had the downturn yet.
Distressed sellers will most likely surface early in 2024 creating buyer opportunities for those who patiently waited. There is no need for FOMO to dominate what buyer pool there is with current high borrowing rates in the background. FHB's should consider making lowball offers from early 2024.
Saw an off the plan property for sale by an off the plan buyer who is unable to settle at settlement date.
Expect more of these to come.
From the sale listing:
PRIVATE SALE - WANTING TO REASSIGN CONTRACT IF POSSIBLE.
I am a FHB on single income. Unfortunately due to high interest rates. I can't afford to draw-down a big enough mortgage for the house...putting me in a bad situation.
I am trying my luck here to see whoever would be interested in taking over my contract (reassignment). So you take over the warranties (36 months) etc.
Can understand folk favouring buying rather than renting, even in the face of traditional fundamentals.
The biggest fundamental that favours buying property is that a whole lot of MPs have large property portfolios they don't want to see falling in value or performing poorly over time. NZ has incredibly favourable policy for property as a result, and some are campaigning on even more policy to pump their portfolios.
In my opinion we should regard our politicians' favouring their huge conflicts of interest as corruption.
Bang on Rick. The primary reason to invest in property is that our leaders have a vested interest to protect property prices above all else.
House prices may dip - but sure as eggs is eggs the ruling class is gonna open the immigration floodgates, change tax rules, allow foreign buyers, increase accomodation supplements and just about every other lever they can pull - until demand forces prices up...
That said... i personally think we have some serious economic structural issues that will (at some point) cause house prices to fall. I suspect it will happen when we realise we cant attract people or external investment to NZ anymore because our standard of living has dropped so far that our public services become second world and crime becomes unmanageable...
Possibly Luxons experiment to attract digital nomads and entrepeneurs is an experiment to see if we can pivot from importing fruit pickers to people who may actually pay enough taxes to support themselves as part of society.
Interesting times... watch closely and keep a flexi ticket to Aus handy
The only concern I have is at some point the fight against inflation will be surrendered in order to 'save' the economy and that inflation will be allowed to run riot in order to revalue the massive debt that is out there. It cannot be repaid, so inflation seems to be an option.
That said, I'd expect to see house declines for many months yet, and significant. There is a lot of supply out there - think empty homes, air bnb, ma and pa in the big home, forced sales etc. All of these coinciding will do it.
Iceman this article seems to have it a sore spot with you, again it’s never to late to see a financial advisor many on here did warn you a crash was about to happen back in 2021 many of us could see the bubble with house prices being in some cases 10 x income the crap had to hit the fan sometime.
DTRH thanks for you concern and obsession with me, I’m actually doing quite fine, the high rates are mildly annoying but I’ve increased rent of my rentals to help recoup that and my lovely tenants fully understand the situation. You’d be foolish to think I didn’t realise there’d be a correction after those crazy gains. Thanks for your concern anyway, just got back from the islands with the family and couldn’t feel more upbeat about things. Prices have just about stabilised/flatlined but you can continue you obsession about this big crash incoming.
There's an article to help you join up some of the dots... umm... where did I see it... oh, above this comment section.
Jones said the average expense associated with purchasing the median New Zealand home currently exceeds that of renting by just over $38,000 per year
But if house prices were to rise by around 5% over the coming year, this shortfall would be entirely offset by a positive house price revaluation...
...In contrast, if house prices were to go in the other direction it would dramatically increase the shortfall...
Take your deposit ($200K), invest it. Invest the shortfall $38K per year - that's what you have after renting, if you want something to compare with the eventual paid off asset of a home.
Your sweeeeeping generalization of course comes right if house prices return their eternal rise towards infinity, and if interest rates decrease, and rents increase along the way. All that will probably come true but we're simply speculating on the future there.
well, if i merely put the difference between the mortgage+rates+insurances+maintenance and my rent aside ... a debt free, liquid asset.
how long after the mortgage is paid off do you have to continue living in the house for it to become overall cheaper than renting? we could afford 65 years rent for the total cost of the mortgage on the house we rent.
Is your entire argument based on renters pissing away the big savings they are making over their hypothetical home-owning selves? Sadly you are right in many cases, and housing is a good forced-saving scheme for those unable to manage their finances. For those able to comprehend savings and investment, buying and living in a house is just one from a whole host of options to set up their future finances.
Yes. Even if property inflated inline with wage inflation for 30 years, rents will likely do the same. The mortgage balance doesn't rise w/ inflation. A renter's pay rise will go towards the rent increase. The owner can (aside from interest rate spikes) put pay rises towards the principal amount.
Sure, if someone is savvy they could invest early savings from renting. Assume they do well, after 15 years what do they say to the kids? "Sorry you had to move 3 times during school and battled to make friendships, look on the bright side Dad's made bank in the S&P 500".
"Past performance is no guarantee of future results" is generally treated as a warning label: Don't assume an investment will continue to do well in the future simply because it's done well in the past.
If you want to make the argument that paying your own home off makes more sense than paying someone else's, then fine. But if you buy a home at today's high price, and interest rates keep going up, you might find you're stuck paying interest only and none of the principle, and not moving forward as you imagined. In other words, is it worse paying a landlord or the banks?
Why do people always use meaningless platitudes to alleviate their cognitive dissonance when reading articles like this..?
Something something somebody else's mortgage something best time something something yesterday..
The figures are right there in front of you.
If your median house appreciates in capital value to the same degree property has on average over the last 30 years, your house will be worth 4.2 mil by the time the mortgage is paid off.
If you invest the $36,000.00 difference every year, over the same period in the S&P 500, at the historic average annual return you'll have a portfolio of 10.4 mil.
I don't believe either of those scenarios are realistic from here on out, but clearly owning at any cost does not always beat renting!
Incorrect - not if you use leverage to buy more rentals, co payment from tenants essentially to pay off those mortgages, capital gains on them, and post paying off the mortgage- the key is having permanent positive cashflow and a debt free asset. It’s a total no contest than having to save and put your own money into shares. You can also end up without an asset in shares if a company goes bust. Basically impossible with property. Don’t even get my started on claiming depreciation, expenses etc to offset tax which you can’t on shares.
I'm not sure if you're up to date with the state of stock investing these days. It's trivial to buy a slice of thousands of companies across the whole world for a fraction of a percent. There is no reason to expose yourself to the kind of risks you think are prevalent when buying shares.
Do you think there is more chance of the S&P 500 falling to zero, or of your rental property equity falling to zero because of the general market falling, or a tenant trashing the place, or a gang pad setting up next door, or any of the other multitude of ways property investors can come unstuck?
Do you think there is more chance of the S&P 500 falling to zero, or of your rental property equity falling to zero because of the general market falling
For residential property, the owner's equity can go below zero (i.e. negative equity) - due to the leverage. There were some owner occupier buyers who purchased in 2020 - 2021 period using a 10% deposit (a 90% mortgage). Due to the house price falls, they are now in negative equity.
The key question is can they continue to hold on until the house price recovers? or will they be under pressure to sell?
Mfd - thanks for the education, I’m familiar with index funds. I think you’re missing the whole point of leverage and how it can be used to compound your growth, all without using any of your own money whilst having tax benefits etc etc none of which you get with shares. I buy in nice areas and hand pick tenants, very low risk of the place getting trashed. Ultimately it’s very low risk to me.
The difference is that it’s a paper loss. they will definitely come back from the temporary negative equity.
The key essential underlying assumption is that the owner can continue to hold on and continue making mortgage payments until the house price recovers. This may not be the case for many highly leveraged buyers of 2020 - 2021.
For example some of those borrowers who purchased in 2020 - 2021 have had their lenders undertake mortgagee sales.
Here is a property purchased in September 2021 that went to mortgagee sale in July 2023
https://homes.co.nz/address/auckland/glen-eden/29-routley-drive/8Q87
You are just ignoring the numbers presented in the article though.
Of course if you bought a couple of houses for 100k each back in the day, no worries. Very different proposition today topping up a $750,000 mortgage with a shortfall of $40 grand a year for the next 30 years to get it paid off..
Assuming $550 per week rent in year 1 is $40k better off than a mortgage. What if rents increase by 5% p.a.?
Well by year 10 that shortfall is $24k. 15 = $12k. 20 it's gone. Assumes no increase to mortgage principal payments.
Meanwhile if you invest $200k deposit in S&P500. Returns 8% p.a. (I think that's the long term average?) then you'll have $1.9m by year 20. This is based on you investing the difference and it scaling down as your rent increases and compounding returns. I haven't allowed for tax, so could be even less??
"You can also end up without an asset in shares if a company goes bust. Basically impossible with property."
Can you help me to understand you correctly. Do you mean:
1) The price of the property cannot fall substantially (compared to the share price of a company which can fall by 100% if a company goes into bankruptcy)?
2) Investment in real estate means it is basically impossible to lose your entire investment?
3) other
Do you keep investing that $36k p.a. difference every year? What happens when the rent goes up over time? That difference shrinks.
Not saying that the investment won't do well, but there comes a point at around year 13 - 15 where if rents continue to rise at a modest pace the nominal rent amount will exceed the mortgage payments.
Moved from renting to owning this year in Auckland. For us, even in the short term and giving no thought to capital gains, we are better off week by week on cashflow. A 3 bedroom rental where we live is $800 pw. More than our mortgage repayment (principal and interest). Granted we had a better deposit than most FHBs. But the conclusion this article makes may not be the same for everybody. Do the sums for yourself.
That's interesting advice. So when I'm living on my TD and I don't have to work I'm somehow an idiot according to most on here, but if I was spending it on rent that's somehow genius ? Long term buying a house is a no brainer, in 25 years time I guarantee your $1M house will be $2M+.
60k of outlay just to stand still. No principle being paid off. 80k of pre tax salary. Why, why ,why.
What will restart the Ponzi? Use political control of RBNZ to abandon the 2% inflation target. Lower interest rates. Defacto devaluation of the NZ dollar. Make property more affordable for overseas investors.
Hearing the rent boom being bandied about in recent times. In the case of Aussie, the dynamics are quite obvious. But what happens to non-shelter spend hold up if more share of wallet is allocated to shelter? And how does that reconcile with the ability to raise rents? The houses of 10+ South Asian wage slaves is not mainstream yet.
Where are people going to get the money? The politicians have been bleating on about the cost of living crisis as it stands already. If National get in the minimum wage and WFF are unlikely to increase much. Low wage immigration won't help unless it forces more multiple families to live together.
There is no law of nature stating investors must always make a profit. Though politicians might try.
Forgetting that the current plan is to remove money from the economy. "Rents will rise" while inflation is hot and the economy is shrinking? Even with the immigration gates swung wide open, it's only cramming more people in the same rental.
Rental yields will reverse next year on the back of a speculative bull run. Short lived. Those with cash will be sucked up for low yield property and the real hit will come later than we're all expecting - I'm seeing 2026 through 2028.
Low wage immigration won't help unless it forces more multiple families to live together.
Precisely. F'more, low-wage migrants tend not to spend like drunken sailors. Their objective is to save. Sure it's a boon for slumlords and does have an impact on GDP (but nowhere near as great as estimated). Actually Aussie consumer spending data is relatively flat.
"Inflation tends to deflate the value of borrowers’ debt over time. More importantly, what happens to house prices ends up being the key swing factor. And no one knows what’s going to happen there."
Heavily vested Property Spruikers claim to know. The truth right now is that an 8%pa jumbo mortgage on a declining asset is more a story of debt gaining in value whilst slowly and excruciatingly sucking what equity remains.
This is a really good analysis. We contemplated renting for an extended period after selling the lot in mid 2021. I was 99% sure this would be the wiser financial decision. However, we added ‘life’ into the equation, including young kids nearing school age. Once my career un-%@#$ed itself, back into home ownership we went. I still question what the better decision would’ve been all things considered, but there’s no doubt that home ownership has value beyond pure economics.
I still question what the better decision would’ve been all things considered, but there’s no doubt that home ownership has value beyond pure economics.
Is it worth 1,012,000 over 30 years? Refer Peaker vs Trougher example above of my friend who purchased in Aug 2021.
Equally hard to put values on some of the negatives as well, i.e. moving kids to a worse school zone for affordability, losing freedom of movement, phycological impact of having huge debt, greater exposure to loss through natural disaster, crime or similar circumstance...
For those who want to determine whether they will be financially better off renting or buying, here is a 30 year calculation.
https://youtu.be/8zwImzEuXO8?t=262
People should make their own key assumptions for these 4 variables:
1) mortgage interest rate over the next 30 years
2) rental inflation over the next 30 years
3) capital growth of house prices over the next 30 years
4) capital growth of alternative investments over the next 30 years
Under some scenarios owning is better than renting
Under some scenarios renting is better than owning
This will be the largest financial decision for most owner occupier households and hence it will likely determine their financial future.
You'd have to make the heroic assumption that capital gains in the future will look like the recent past, where interest rates steadily fell and supply was choked.
Plus you'd have to lack sufficient imagination to invest in absolutely anything other than property and maybe TDs.
This still leaves quite a few people lining up to make the most mediocre investment of their lives.
You'd have to make the heroic assumption that capital gains in the future will look like the recent past,
Have seen some property investor calculations use a nominal house price growth assumption of 5.0% p.a for the next 30 years (down from 6 - 7.0% per annum assumptions pre Nov 2021). whilst their inflation assumption is 2.0% p.a. (Note that is an inflation adjusted return (i.e. real return in economist speak) of 3.0% p.a for 30 years)
Those 5.0% p.a nominal house price growth have been based on extrapolations of long term historical house price increases (and property investors believe this is conservative as it is below long term historical house price growth). Whether this assumption for house price growth proves to be correct in the future is key.
https://youtu.be/8zwImzEuXO8?t=265
No doubt, owning beats renting over the long term, even as a narrow financial decision, assuming even minimal capital gains at present values.
However, it is far from obvious that this is a good time to buy for FHB, even given recent price falls. As a boomer homeowner whose two kids have made different decisions in recent years, I can attest that these have led them to very different financial outlooks and stress levels.
My son took the plunge a little more than two years ago. He didn't ask my advice, so I didn't give it. He also elected for the cheapest rate, which was 2 years at the time. Guess who recently saw his mortgage payment more than double? He's lucky to have a dad with a lot of equity, though he's too proud to ask. For now.
My daughter did ask for my advice, which was: wait awhile. Needless to say, she's glad she did, though she too is now actively looking. Despite the 25-30% falls in Welly, my advice in this region is still to wait. Until when? In my view, at least until there is good evidence that rates have started falling, and/or we see another significant price drop in the range of 15-20%. That is entirely within the realm of possibility, in my opinion. Again, I think Wgtn is especially at risk, particularly if a NACT government is elected, which looks highly likely at this point.
That's true, though there wasn't nearly as much pressure to buy in mid-late 2020. The market had just re-opened and a lot of people were still very cautious.
No doubt that he made a huge mistake in not fixing for five years, when rates were so incredibly low. Like a lot of people, he probably got a bit greedy.
What cherished family home are you on about, Kev? The boomers are living in NZ's cherished family homes. They're only moving out when they 'downsize' and their adult kids (who generally live in Oz if they're professionals or successful in any way) don't typically care.
Most families with children are either living in a rental where they can't as much as hang their pictures (renters talk about their 'rental', definitely not their 'cherished family home' - are you kidding?), or living in a tiny dump they're paying a fortune for in mortgage payments.
Wow, your comment is so amazingly out of touch! Mind-boggling, really.
Hmm, another comment of yours that does not make any sense to me. My comment was not about my own situation (I'm not the adult child of Kiwi parents), as you seem to assume?
Your first comment seems to paint a picture of a family living in a rental and calling their rental a "cherished family home", "filled with countless memories". Was that indeed what you meant? You seem to hint that they should rather buy a house. You know, the kind of small, dingy, dump on the outskirts of a dodgy neighbourhood that is typically targeted at first-home buyers - to avoid the lack of security commonly faced by renters in NZ. Am I getting this right?
Anyway, whatever. I'm often gobsmacked by the 'quality' of the arguments and 'reasoning ability' of NZ's 'smart and savvy' landlords, many of whom cannot do the simplest math equations or string together even the shortest chain of logic.
Nah, you just wait until the kids are about to leave school. Apologize to them for providing a disruptive environment, having to move schools a couple of times etc. But tell them if it's any consolation, you made a fortune on the S&P 500 so you can retire early.
Then as time passes, throw out the odd quip at Christmas time about how you're spending their inheritance and leaving the rest with the Sallies when you die.
I do think the population is going to continue to grow for the foreseeable future.. obviously. That wasn't your question though. At some point NZ deaths are likely to be higher than births, as is seemingly the ultimate destination of all developed societies. Can we offset that in the future with perpetual net positive migration ad infinitum. Unlikely.
https://tradingeconomics.com/new-zealand/interest-rate
Click 'max' and consider how the long term downward trend correlates to property prices. Then consider whether that long term downward trend can continue.
I sold my late mother's house at auction last night, a brick and tile in West Harbour which needs substantial refurbishment. I had it built for her in 1986, cost $140,000.
It sold for $1,296,000, a compound annual return of 6.2% and she got to live in it as well. A very good tax-free return on investment.
So that 6.2% takes into account the rates, (mortgage interest -if any), insurance and maintenance over that time?
I didn't think so. But if you did the rate of return would probably be below 4%.
Compared to $140k plus $1200 per year added to a NZX50 stock portfolio would have netted 8.8% annual TAX-FREE returns for a total of $1,844,686. With no insurance, maintenance or rates to pay.
The internal rate of return (IRR) calculated on net cashflows to the property owner (the equity deposit and mortgage principal payments) would be higher than 6.2% p.a.
Leverage is the main attraction for most property buyers.
It works when asset prices rise AND when asset prices fall.
The cost of stock market investment has fallen dramatically (even to zero in some cases overseas). You can buy index funds in NZ for a small fraction of a percent now - 0.2, 0.3% annual fees to buy a worldwide index fund.
The days of paying 1-2% plus performance fees are long gone, unless you particularly want to support a fund managers lifestyle.
I've dabbled quite a bit in the stock market myself over the years, and witnessed some colossal crashes. The trick is to get out when everyone else is saying to get in.
There's been plenty of tearful letters to the NZ Herald recently from people who've found their investments are taking a very severe pasting. We always need place to live. I've made a fortune out of property, I sold my last property for just under $2m more than I paid for it.
Yes, Kiwis in general seem to have very poor financial knowledge and often seem to think investing in the stock market means picking one or two companies and going balls-deep. I understand the crash in the late 80s was quite brutal here - the rest of the world has long forgotten that one.
The result is property has been bid up to crazy prices by investors afraid of touching anything else. That has been a self-fulfilling prophecy but I don't see a long term future in it. We simply can't have property prices rise so much faster than wages for much longer without something breaking. Soon the old 'investor cohort' will be down sizing their portfolios, and switched on youngsters are much more interested in the stock market (or crypto) than property.
"I understand the crash in the late 80s was quite brutal here"
A whole generation of investors were psychologically scarred with their experience in the share market in the crash of 1987. These people have subsequently preferred to invest in assets which have market prices with low volatility (i.e property). I know several people of this generation who will stay well away from shares.
The next few generations of investors who avoided experiencing large price falls in the share market do not have that psychological scarring.
Kiwis in general seem to have very poor financial knowledge
This is a global phenomenon - financial literacy globally in developed economies is low.
A friend of mine who is a partner in a large accounting firm (experienced accountants are thought to be financially savvy) bought property near the peak. (see comment about Peaker above)
Another 2 friends who are accountants were also looking to buy at the peak.
"I understand the crash in the late 80s was quite brutal here"
A whole generation of investors were psychologically scarred with their experience in the share market in the crash of 1987. These people have subsequently preferred to invest in assets which have market prices with low volatility (i.e property). I know several people of this generation who will stay well away from shares.
The next few generations of investors who avoided experiencing large price falls in the share market do not have that psychological scarring.
Kiwis in general seem to have very poor financial knowledge
This is a global phenomenon - financial literacy globally in developed economies is low.
A friend of mine who is a partner in a large accounting firm (experienced accountants are thought to be financially savvy) bought property near the peak. (see comment about Peaker above)
Another 2 friends who are accountants were also looking to buy at the peak.
I remember the '87 crash very well, I made a lot of money. I was a single man and bet my house on the stock market in '86. I had a floating mortgage from Countrywide Building Society which I could run up to $100k, so I piled in bought a heap of shares.
I was well aware that it was booming and at the rate of increase we were entering what you might call the 'danger zone'. I visited the stock exchange in Queen St after I heard about the hysteria. Sure enough people were whooping and hollering, and one guy yelled out "and there's another new car" as the chalky babes notched up more gains on the blackboard.
I went home and sold up, and a few months later in October the market tanked.The boom went for much longer than I anticipated, but I made plenty so I was happy. People lost fortunes, many lost their houses.
It was boom many these days can't possibly imagine - I bought a new car and sold it a few months later for more than I paid for it, partying downtown, drinking expensive bubbly, house prices exploding, all people could talk about was which shares they'd recently bought, and grifters like Allan Hawkins on TV with his oily camp followers.
A colleague from work retired and sunk most of his very substantial superannuation into the stock market on advice from his broker, and after the market took a hit was advised to "throw everything at it, because this is the bottom" Unfortunately it was still at the top.
A little bit of reminiscing...the good ol' days.
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